TORONTO, August 8, 2018 – Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the second quarter ended June 30, 2018. All figures are in U.S. dollars.

1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

Summary of Revenues and Gross Margin(In Thousands of US Dollars)

Revenue

Gross Margin

3 Months ended June 30

3 Months ended June 30

2018
(Unaudited)

2017
(Unaudited)

2018
(Unaudited)

2017
(Unaudited)

Network Access Services:

Mobile Services

22,411

20,379

10,433

9,677

Other Services

1,895

1,248

605

302

Total Network Access Services

24,306

21,627

11,038

9,979

Domain Services:

Wholesale

Domain Services

42,540

48,550

6,696

6,101

Value Added Services

4,601

5,415

3,853

4,800

Total Wholesale

47,141

53,965

10,549

10,901

Retail

8,477

7,663

4,031

3,115

Portfolio

1,163

968

968

783

Total Domain Services

56,781

62,596

15,548

14,799

Network Expenses:

Network, other costs

–

–

(2,701)

(2,261)

Network, depreciation and amortization costs

–

–

(1,727)

(1,169)

Total Network expenses

–

–

(4,428)

(3,430)

Total revenue/gross margin

81,087

84,223

22,158

21,348

“The second quarter once again saw solid performances from each of our businesses,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “The domains business delivered consistent results outside of the expected in quarter impact of the transfer of 2.65 million very low margin names in the first quarter of this year. Ting Mobile delivered increases in year-over-year revenue and margin as we work towards the next phase of customer growth. Finally, Ting Internet continued its steady progress from network builds and expansions across the footprint to serviceable addresses, to subscriber activations, to dependable recurring monthly revenue.”

Financial Results

Net revenue for the second quarter of 2018 was $81.1 million compared to $84.2 million for the second quarter of 2017, with the decrease due primarily to the bulk transfer of 2.65 million very low margin domain names during the first quarter of 2018, which was partially offset by the continued growth of Ting Mobile.

Net income for the second quarter of 2018 was $3.6 million, or $0.34 per share, down from $5.2 million, or $0.50 per share, for the second quarter of 2017. Net income for the second quarter of 2018 includes acquisition and transaction costs of $0.8 million related to geographic headcount and operational alignments.

Adjusted EBITDA1 for the second quarter of 2018 increased 8% to $11.2 million from $10.4 million for the second quarter of 2017.

Cash and cash equivalents at the end of the second quarter of 2018 was $11.2 million compared with $16.6 million at the end of the first quarter of 2018 and $15.1 million at the end of the second quarter of 2017.

Notes:
1. Adjusted EBITDA

Tucows reports all financial information required in accordance with United States generally accepted accounting principles (GAAP). Along with this information, to assist financial statement users in an assessment of our historical performance, the Company typically discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and on investor conference calls and related events that exclude certain non-cash and other charges as the Company believes that the non-GAAP information enhances investors’ overall understanding of our financial performance.

The Company believes that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of the Company’s core business using similar evaluation measures to those used by management. The Company uses adjusted EBITDA to measure its performance and prepare its budgets. Since adjusted EBITDA is a non-GAAP financial performance measure, the Company’s calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. The Company endeavors to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company’s results. Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

The Company’s adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transitions costs. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

*Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of Enom in January 2017. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

Conference Call

Beginning this quarter, Tucows is evolving the format of its quarterly conference calls. Concurrent with the dissemination of this news release, management’s pre-recorded remarks discussing the quarter and outlook for the Company have been posted to the Company’s web site at http://www.tucows.com/investors/financials/. In lieu of the usual question and answer period on past calls, for the next seven days (until Wednesday, August 15), shareholders and analysts can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Wednesday, August 22 at 9:00 a.m. ET. Questions that are more specific will be responded to directly. All questions will receive a response.

About Tucows
Tucows is a provider of network access, domain names and other Internet services. Ting (https://ting.com) delivers mobile phone service and fixed Internet access with outstanding customer support. OpenSRS (http://opensrs.com) and Enom (http://www.enom.com) manage a combined 24 million domain names and millions of value-added services through a global reseller network of over 38,000 web hosts and ISPs. Hover (http://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (http://tucows.com).

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995 including statements regarding our expectations regarding our future financial results and, including, without limitation, our expectation regarding our ability to realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Information about other potential factors that could affect Tucows’ business, results of operations and financial condition is included in the Risk Factors sections of Tucows’ filings with the Securities and Exchange Commission. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements are based on information available to Tucows as of the date they are made. Tucows assumes no obligation to update any forward-looking statements, except as may be required by law.

Tucows, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Beginning this quarter, Tucows is evolving the format of its quarterly conference calls. Concurrent with the dissemination of the quarterly results news release at 5:05 p.m. ET on Wednesday, August 8, 2018, management’s pre-recorded remarks discussing the quarter and outlook for the Company will be posted to the Company’s web site at http://www.tucows.com/investors/financials. Following management’s pre-recorded remarks and for the next seven days (until Wednesday, August 15), shareholders and analysts can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to the most salient questions at http://www.tucows.com/investors/financials on Wednesday, August 22 at 9:00 a.m. ET.

Tucows believes this new format will be beneficial to investors, providing more time to digest information provided in management’s remarks and to formulate substantive questions and allowing all investors, at their convenience, to benefit from questions posed by the entire Tucows shareholder community.

About Tucows

Tucows, Inc. is a provider of network access, domain names and other Internet services. Ting (https://ting.com) delivers mobile phone service and fixed Internet access with outstanding customer support. OpenSRS (http://opensrs.com) and Enom (http://www.enom.com) manage a combined 24.4 million domain names and millions of value-added services through a global reseller network of over 40,000 web hosts and ISPs. Hover (http://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (http://tucows.com).

Tucows, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

On Friday the 25th of May, ICANN filed a legal action1 against EPAG, a Tucows-owned Registrar based in Bonn, Germany. This action was taken because of a disagreement between Tucows and ICANN on how the GDPR should be interpreted, with respect to our contracts. While we look forward to defending our position in court, the below is intended to provide some context and insight into the dispute.

The GDPR begins with a statement of its core principle: “The protection of natural persons in relation to the processing of personal data is a fundamental right.” Tucows has long been concerned with privacy and the rights of our customers, and takes the principles enshrined in this law extremely seriously.

In order to have a domain registration system reflective of “data protection by design and default”, we started with the GDPR itself and crafted our procedures and policies around it. We built a new registration system with consent management processes, and a data flow that aligns with the GDPR’s principles. Throughout the registration life-cycle, we considered things like transparency, accountability, storage limitation, and data minimization.

We realized that the domain name registration process, as outlined in ICANN’s 2013 Registrar Accreditation Agreement, not only required us to collect and share information we didn’t need, it also required us to collect and share people’s information where we may not have a legal basis to do so. What’s more, it required us to process personal information belonging to people with whom we may not even have a direct relationship, namely the Admin and Tech contacts.

ICANN’s goal since discussions about the impact of the GDPR on domain registration began has been to preserve as much of the status quo as possible. This has led ICANN to attempt to achieve GDPR-compliant domain registration via ‘process reduction’, as opposed to Tucows’ approach of starting with the GDPR and rebuilding from the ground up. These two approaches have led to significantly different results, and consequently a need to determine whether ICANN’s insistence on the collection of the full thick Whois data and this data’s transfer to gTLD Registries is in compliance with the GDPR. It is this disagreement and need for legal clarity that is at the heart of the lawsuit filed by ICANN.

—

On the 17th of May 2018, the ICANN board passed a ‘Temporary Specification2‘, meant to temporarily bring gTLD registration services in line with the GDPR. The goal of the Specification is to serve as a stop-gap while the ICANN community works to resolve and balance issues between privacy law and existing ICANN policy.

With that background in mind, we perceive three core issues with the Temporary Specification that we do not believe are compliant with the GDPR. These issues are the collection, transfer, and public display of the personal information of domain registrants and the other contractually-mandated contacts.

Personal Data Collection

Article 5(1)(c) of the GDPR speaks to data minimization: collecting and processing only what personal data is necessary. It is clear to Tucows that we need to continue capturing some information about the domain Registrant—we always want to ensure we have the ability to contact the person legally responsible for the domain. However, in the vast majority of gTLD registrations, the Registrant (Owner), Admin, and Tech contacts are the same. As such, collection of Admin and Tech contacts is meaningless, as the data belongs to the Registrant.

That said, in the less common scenario, the Admin or Tech contact does not match the Registrant. In these cases the mandatory collection of their contact data is problematic because it requires us to store and process personal data belonging to people with whom we have no legal or contractual relationship.

ICANN will need to prove that the minor, marginally incremental benefit of collecting, processing and transferring Admin and Tech contact data at the request of third parties outweighs the principles of data minimization and lawful processing enshrined in the GDPR. We find the argument that duplicative technical contacts are necessary for the security and stability of the DNS implausible. We were not convinced this was the case when we first examined the law, and we remain unconvinced following the release ICANN’s Temporary Specification.

Tucows will continue to ensure that those with legitimate purposes, including law enforcement, intellectual property, and commercial litigation interests will have access to domain registrant information. On a daily basis, we see plenty of important circumstances wherein we find sharing that information to be legally is necessary, and this will not change. We collect a contact for the owner of each domain name sold on our platforms, and have the ability to contact the owner. When necessary, we also share that contact with law enforcement and others with a legitimate interest.

Personal Data Transfer to a Registry

ICANN’s continuing requirement that registrars transmit all data collected to the relevant registry is counter the GDPR’s principle of use of data only when a legitimate legal basis applies. There are circumstances where this transfer is necessary and reasonable, for example where a TLD has specific registrants requirements such as geographic restrictions. We are not opposed to these circumstances, but require agreements between ourselves and the registry for the specific collection, processing and transfer of that personal data.

However, as the registrar, we collect data that we need in order to enter into a contractual relationship with and provide requested services to the registrant. Transfer of that data to a registry is unnecessary—this is proven by the decades-old ‘thin model’ that 140 million .com and .net domains follow. We don’t feel that the temporary specification offers a robust legal basis for the transfer of data to registries and therefore presents an unacceptable risk under the GDPR.

Personal Data Display

ICANN has also required that we continue to publish the organization, state/province, and country fields in the public Whois. We disagree that the organization should be published because, although it is optional, many people do not realize this and put their own first and last names in the organization field. We do not want to expose the personal data of these registrants because of a misunderstanding, and it will take considerable time to educate registrants and cleanse this data from the field.

Desire for Clarity

Fundamentally, ICANN and Tucows disagree on how the GDPR impacts our contract. The facts and the law as we see them do not support ICANN’s broader view of what will impact the security and stability of the internet. Neither do we find the purposes outlined in the temporary specification proportional to the risks and consequences of continuing to collect, process and display unnecessary data. We look forward to, and welcome the clarity that will come from this legal action.